Greek tragedy

You don't say, Alexis!  Greek PM Alexis Tsipras has warned his fellow citizens of "real difficulties" ahead, despite the short-term deal agreed with Eurozone creditors (mainly Germany) on Friday.  Tsipras told the nation that the deal "cancels austerity", but this is far from the truth.  The whole agreement could unravel as soon as Monday if Tsipras's government fails to come up with a fresh list of reforms that must be approved by the Eurozone.  Even if that hurdle is crossed, the extension to the existing bailout package is only for four months, so the pressure to find a long-term solution will ramp up immediately.

Tsipras is facing a tough time selling the deal to the Greek people because he campaigned on putting an immediate end to the creditor-imposed austerity that has crushed the economy, cutting real GDP by more than 25 percent. In truth, this was a promise that was never in his power to deliver. It takes two to renegotiate a debt, and there was little incentive for the Eurozone (i.e. Germany) to go along. Any real concessions would quickly have brought other heavily-indebted nations (Portugal, Spain, maybe even Italy) to the table looking for similar relief. While the "nuclear option" of reneging on the debt was theoretically available (and still is, if the negotiations go nowhere), the consequences of such a move for the Greek economy would have made the country's current problems seem like a golden age.

The uncomfortable truth is that Greece should never have been allowed to join the Eurozone in the first place. It was only allowed to do so because it misled the ECB about its compliance with the so-called Maastricht criteria that were meant to ensure that key economic indicators, notably inflation and public sector deficits, were converging with EU norms. It's worth remembering that it was assisted in concealing the true level of public debt by big US investment banks, who put together some sophisticated (and no doubt very lucrative) swap transactions to conceal the real numbers.

All of that said, there can be little doubt that austerity, particularly to the brutal extent imposed on Greece by its creditors, was precisely the wrong medicine at the wrong time. Now that the economy is prostrate, Greece's debt burden is even more unmanageable than it was before the crisis began.  No doubt all sides will put their best efforts into striking a long-term deal in the next four months, but behind the scenes, both Greece and its creditors will be busy preparing themselves for the possibility of the dreaded "Grexit".